It is possible Canada's six biggest banks will be designated systemically important domestically, resulting in the need for higher capital cushions that could curtail future dividend increases, share buybacks, and acquisition activity, ratings agency Fitch said Tuesday

Canada’s six biggest banks could be designated as systemically important to the domestic economy, resulting in the need for higher capital cushions that could curtail future dividend increases, share buybacks and acquisition activity, ratings agency Fitch said Tuesday.

“The potential designation of Canada’s six largest banks (Big Six) as domestic systemically important banks (D-SIBs) may increase capital requirements for those institutions under a framework established by the Basel Committee on Banking Supervision,” the ratings agency said in a note.

Retained earnings are the primary source of additional capital, Fitch said, adding that it should be manageable for all six banks to meet the thresholds.

However, the added designation “could have some influence on future dividend increases, share buybacks, as well as acquisition activity,” the ratings agency said.

[np-related]

None of the banks — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of Montreal and National Bank of Canada — were deemed systemically important on a global basis by international regulators, and they were not included on the list of global systemically important financial institutions.

However, the Basel Committee and Financial Stability Board finalized a framework last month to be used by national banking regulators in identifying banks whose failure could cause significant disruption to the domestic economy in which they operate and potentially cause broader cross-border financial stress.

This framework, which was endorsed on Monday by finance ministers and central bankers at a G20 gathering in Mexico City, gives “some level of discretion” to domestic banking regulators such as Canada’s Office of the Superintendent of Financial Institutions (OSFI) in establishing their domestic regulations, Fitch noted.

“Nevertheless, given the size of each of the top six banks in Canada and the highly concentrated nature of Canadian bank assets on the balance sheets of the Big Six, it is possible that all of them will be designated D-SIBs (domestically systemically important banks),” the ratings agency said.

“The Canadian banks designated as D-SIBs will likely face additional regulatory requirements, presumably including a capital buffer above and beyond Basel III minimum capital requirements” which they intend to meet by 2013.